The Consumption Response to Extended Unemployment Benefits in the Great Recession

52 Pages Posted: 16 Jul 2015 Last revised: 29 Jul 2015

See all articles by Graham McKee

Graham McKee

Princeton University - Department of Economics

Emil Verner

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: July 14, 2015

Abstract

The Great Recession and the years that followed witnessed a dramatic expansion in the duration of unemployment insurance (UI) benefits available to unemployed workers in the United States. An important motivation for this policy was to stimulate demand by transferring funds to households that would be likely to spend them. This paper uses the variation across states in the UI expansion to estimate the consumption response to extended UI benefits. We estimate that an additional week of UI increased household consumption by a statistically significant 1.68 percent. Consistent with the hypothesis that unemployed households are likely to be particularly liquidity constrained, this point estimate translates into a marginal propensity to consume out of UI benefits in the range of 0.59-0.91, which is larger than existing estimates of the consumption response to income transfers for all households.

Keywords: Consumption, unemployment insurance, fiscal policy

JEL Classification: D12, D91, E21, E62, J65

Suggested Citation

McKee, Graham and Verner, Emil, The Consumption Response to Extended Unemployment Benefits in the Great Recession (July 14, 2015). Available at SSRN: https://ssrn.com/abstract=2630790 or http://dx.doi.org/10.2139/ssrn.2630790

Graham McKee (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Emil Verner

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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